Explain to me why it's better to not overpay on a low rate mortgage?

[Reallybadatdecisions]

I see lots of posts on here recommending to not overpay on a mortgage with low fixed rate and instead to put spare money into a savings account that earns more % interest then the mortgage.

I cant see how this makes financial sense but am willing to be corrected!

Eg

If my outstanding mortgage is very high (london prices) then im paying a big chunk of interest every month on that outstanding balance.

I dont have 100s of thousands spare to put into one high paying interest account so any interest I earn monthly in savings is pretty tiny in comparison to what I'm paying in interest each month on the huge mortgage.

So how is it better to not overpay?, I feel like so many of you have said its better to save then overpay that I must be missing something basic.

A pledge to reduce future allowances that are way beyond what just about anyone can afford is not 'raiding pension pots' and irrelevant to this thread.

The changes introduced at the last budget were intended to stop experienced doctors cutting their working hours or retiring completely because they faced very high tax charges on the notional value of their pensions, ie money that they cannot access and does not exist anyway. It would have been much better to exclude the value of final salary pensions from the lifetime allowance calculation, so hopefully this is what Labour will do.

Could you provide more detail as I am still confused.

Gordon Brown removed tax relief on dividend payments. This didn't remove any money from pension so I am not sure what you mean by 'raid'

As far as I am aware George Osbourne didn't remove any further tax relief on dividends so not sure what you mean by 'double down'

You also mention Lifetime Allowance and Annual Allowance. Agains don't understand how this is a 'raid' as it doesn't take any money out of your pension

Starseeking that is similar to me. My savings are with Nationwide but I didn't think the rate was that good? Also they are meagre! I thought I would still try to chip away at the mortgage while I can afford to, as it is big. I see what everyone is saying but I really want to reduce the term.

@afterdropshock it's actually 4.1%, but you can't withdraw your money for a year, this is the product:

@pinkginfizz9 and @messybutfun

Your comments about ‘raiding’ pension pots make no sense.

Providing fixed rate interest rates is peculiar. That's not what people who need to trickle money into a saver/overpayment will have use for. If you're able to trickle X amount each month in and are considering overpayment versus savings -- Fixed rate account that doesn't allow trickling in is of no use is it?

There are also other soft/human factors to consider which are not based on calculations. people who want to get into a discipline of making a certain amount of overpayment each month possibly also do not have vast reserves of cash sitting on the side where they can simply choose to ignore it, but me and never dip into it. They might want the security of knowing that they’re paying down a debt by overpayment and saving on interest whilst they do so instead of putting it into a regular savers account, where if the boiler breaks, or if the family desperately needs a holiday after a stressful period, that pot will be dipped into.

So the question is to work out, not solely what your trickled in regular amount would earn on a regular savings account, (not a fixed rate account), but also to figure out whether as a household you have the financial capacity and the hard-core discipline to absolutely never dip into that saving pot.

Regular Savers can be a good option for regularly paying smaller amounts in. I've a Halifax one that you can pay up to £250 a month in and that has interest rate of 4.5% as long as you don't withdraw for the year

Thank you. I am going to look into all of this. My income should go up soon but I don't know how much by yet. When I know I will look into saving.

The real upside is investing rather than saving the money, if you're comfortable with the risk. (I work in investing so I'm happy with it). You also keep the flexibility of not having to extend your mortgage if your circumstances change.

Even the FTSE 100 has delivered annual returns of 9% over the last 40 years. Last 18 months aside, I make around 20-30% on my investments a year (in an ISA so tax free).

I've always had an interest only mortgage for that reason and I'm not paying it off until I stop work so my investments have the maximum time to run.

But this topic has been done a lot of MM and not everyone can be convinced. The only proviso is that you have to be disciplined about not frittering it away....

I don’t get it either. We have always overpaid rather than saved. Here are are ball park figures - mortgage is 720 per month, at the moment the breakdown is 500 comes off the capital per month and the interest is roughly 120. If I overpay by 500 it reduces our term by 1 month - thus saving us 120 in interest. If I put 500 in to savings - I wouldn’t get that!! Am I missing something?

Yes, you won't pay anywhere near £120 in interest at the end of the mortgage term, which is the month that you're saving. Then the interest will be pennies.

Plus it's a simple comparison of interest rates. If the rate on savings is higher, the money in savings is earning more money than it costs to borrow that same amount of money. It's no more complex than that.

Not wishing to complicate things but it's not quite a straight comparison of interest rates as it depends on tax too.

If you're a higher rate tax payer and you don't shelter your savings in an ISA, you have to take the tax off the interest rate on savings. If you don't pay tax, it may well be within your personal allowance so tax free.

Talking of interest rates, I was speaking to a fund manager yesterday and he said the current market expectation is four more base rate hikes up to 5.5% this year. Possibly worth bearing in mind if you have a fixed mortgage rate and looking at current savings rates.